In 2014, all borrowers who use an FHA loan to buy a house will pay a mortgage insurance premium (MIP) on their loans. That’s nothing new. But there were a couple of key changes made in 2013 that every borrower needs to know about. In short: the annual MIP now costs more, and you may have to pay it for the life of the loan, or up to 30 years.

Here’s an updated look at the FHA’s MIP and UFMIP rates and rules for 2014.

FHA Mortgage Insurance Premiums (MIP) in 2014: New Rules & Rates

There are two types of mortgage insurance premiums, or MIPs, associated with the government-insured FHA loan program. The upfront premium involves a flat rate and is fairly easy to understand. The annual MIP has a variable rate based on several factors, which often causes confusion among home buyers. Here’s an overview of the different insurance rates for FHA loans in 2014.

1. Upfront MIPs in 2014
The upfront mortgage insurance premium (UFMIP) rate is currently 1.75% of the base loan amount. For example, the upfront premium on a $300,000 home loan would be $5,250. The UFMIP can be paid as a single lump sum at closing, as part of the borrower’s closing cots. Or it can be spread over the life of the loan and added on to the monthly mortgage payments.

The 1.75% rate will apply to FHA loans originated at the start of 2014, because there haven’t been any rule changes announced. The Department of Housing and Urban Development (HUD) has revised the FHA MIP rules in the past, and they could do so again in 2014. Such a change would come in the form of a “Mortgagee Letter” and would be widely publicized. But there are currently no new rules pending, regarding these premiums. So we expect the 2013 upfront MIP rates to roll over into 2014 — at least initially.

2. Annual MIPs in 2014
There is also an annual mortgage insurance premium (MIP) applied to FHA loans. The exact cost will vary based on the size and the term (or length) of the loan. When the term is less than 15 years, the annual MIP rate can range from 0.45% to 0.70%, depending on the LTV ratio. When the term is greater than 15 years, as is the case for most FHA loans, the MIP can range from 1.30% to 1.55%, depending on LTV. See the table below for a breakdown of the annual rates.

FHA Annual MIP (Loan Term More Than 15 Yrs)

Base Loan Amount $625,500 or less

Base Loan Amount above $625,500

LTV 95.01% or more 1.35%
LTV 95.00% or less 1.30%

LTV 95.01% or more = 1.55%
LTV 95.00% or less = 1.50%

FHA Annual MIP (Loan Term 15 Yrs or Less)

Base Loan Amount $625,500 or less

Base Loan Amount above $625,500

LTV 90.01% or more = 0.70%
LTV 90.00% or less = 0.45%

LTV 90.01% or more = 0.95%
LTV 90.00% or less = 0.70%

The annual MIP rate structure shown above took effect in April 2013. We expect these FHA mortgage insurance rates to remain in place through the first quarter of 2014, and possibly for the entire year. Though they could be changed by a future rule revision enacted by HUD. For now, the status quo will continue.

Key Changes Made in 2013

The Department of Housing and Urban Development made several noteworthy changes to the FHA MIP rules in 2013. The two biggest changes were announced simultaneously, with the issuance of Mortgagee Letter 2013-04. This letter increased the annual MIP rate for FHA loans to the amounts shown above. It also changed the cancellation policy, forcing most borrowers to keep the annual MIP for the life of the loan (as opposed to cancelling it when a certain LTV ratio was reached, as in the past).

The table below comes from HUD Mortgagee Letter 2013-04. It shows the revised cancellation rules for the annual MIP associated with FHA loans. This insurance cancellation policy will apply to all loans originated in 2014, unless another rule change supersedes it. We do not expect this policy to be revised again anytime soon.

It’s important to note that most FHA borrowers start with a loan-to-value (LTV) ratio above 90%. They take advantage of the minimum down payment allowed by the program, which is 3.5%. This means that most borrowers who use the FHA loan program in 2014 will have to pay the annual mortgage insurance premium (MIP) for the life of the loan, up to 30 years.

According to Mortgagee Letter 2013-04:

“For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first.”

Borrowers need to thoroughly understand the annual and upfront FHA mortgage insurance rules for 2014, because they affect the total cost of the loan. For more information on the MIP and UFMIP rates for 2014, refer to Chapter 7 of HUD Handbook 4155.2. This handbook is available on the HUD.gov website and can be found with a quick Google search.